Labour labelled the move "the return of the milk snatchers" and said it could lead to a fall in take-up among the 1.5 million children the scheme covers.

The cost of the present scheme, under which childcare providers buy the milk and claim reimbursement from the government later, nearly doubled from £27m in 2007-08 to £53m in 2010-11 and could reach £76m by 2016. The Department of Health said claims for reimbursement in 2010-11 averaged 60p a pint – but could be as high as 92p – when retail prices were about 45p.

Alternatives being examined by ministers are establishing a system of direct suppliers to cut out the middlemen, capping the price childcare providers can claim for milk and issuing e-vouchers to providers.

The scheme has been operating since the 1940s but its free provision remains a politically divisive issue.

David Cameron had to commit one of his earliest U-turns as prime minister in August 2010 by dropping a proposal to remove free milk even as ministers defended the idea for fear of resurrecting the "milk snatcher" label attached to Margaret Thatcher in 1971 when, as education secretary in Edward Health's government, she scrapped free milk for children over seven.

She had privately advised against the decision, and in her autobiography said she "had incurred the maximum of political odium for the minimum of political benefit".

Launching a consultation on how the system might be changed, Anne Milton, the public health minister, said: "Milk has many benefits to children's health and is important for their development. We are committed to continuing to provide free milk for all under-fives.

"But the current scheme has not changed operationally since it began and costs have ballooned … Estimates show that modernising how the scheme operates could save as much as £20m each year."

Diane Abbott, the shadow public health minister, said: "There is real concern that this is window dressing for cruel cuts at the expense of children's health.

"Trying to cut the cost of this scheme may end up snatching milk away from the country's children, disproportionately affecting the poorest. In a recession, which has been made in Downing Street, when there is a squeeze on families, it is the wrong time for risks with our children's health."

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